House Fires Shot Across China’s Bow

A measure passed by the House tonight, which would permit the US to impose tariffs on countries that keep their currencies artificially low, is at this juncture a mere statement of intent. It is nevertheless playing into a dynamic of the hardening of stances between the US and China.

Note that the bill has yet to pass the Senate, but given its wide approval margin, and more important, broad bipartisan support, a win there seems assured. But the bill does not require action, and so leaves any escalation in the hands of the executive branch. Given Obama’s tendency to talk tough and do little beyond elaborate symbolism, such as misbranded reform measures, I would not expect the Administration to suddenly change stripes and increase pressure on China in a meaningful fashion. Not surprisingly, China pointedly lowered the value of the renminbi today, clearly signaling it has no intention of cooperating.

Nevertheless, the move elicited predictable verbal fireworks from the Chinese officialdom. China denied that it undervalues the renminbi, which can hardly be accepted at face value. Not only is the renminbi undervalued 25% by some recent estimates, but the continued purchase of dollar assets is prima facie evidence of continued currency manipulation. Tim Duy has also pointed out that China’s purchases of the yen, which are clearly destructive to Japan, is tantamount to laundering dollar purchases (China buys yen, Japan has to buy more dollars to drive the yen back down). Indeed, Premier Wen Jinbao ‘fessed up that letting the renminbi rise would put a lot of domestic manufacturers out of business. So China clearly has motive for keeping the renminbi low, and it is by his admission to keep otherwise uncompetitive firms afloat.

China also charged the legislation would violate WTO rules, which is narrowly correct if the US does not first certify China as a currency manipulator. But if the US imposed tariffs withing the WTO framework, the impact would be limited due to the cumbersome nature of the countervailing duty process (companies have to prove they are being damaged by directly competing imports).

The measure is thus more important as a negotiating tactic than for any immediate impact. Congress has signaled loud and clear that it wants to see some movement from China. Given the wide margin of the vote, if China does not make some concessions and US unemployment and trade deficits remain high, Congress is likely to vote in legislation that has more real clout. The rhetoric was heated. Per the Financial Times:

“If China wants a strong trading relationship with the United States, it must play by the rules,” Nancy Pelosi, Democratic speaker of House, said ahead of the vote on Wednesday.

Some of the rhetoric was even stronger. “They cheat to steal our jobs,” said Mike Rogers, a Republican from Michigan, while Dana Rohrabacher, a Republican from California, attacked China’s “clique of gangsters” that was doing “great damage to the people of the United States of America”.

With the US having plenty of resources slack, this is one of the few times that orthodox economists would endorse trade restrictions. Normally, domestic considerations would be offset by the desire of US corporations to maintain access to China’s market, but the China has also recently become a less friendly venue for foreign players.

The problem, however, is China has taken to being non-negotiable, and is usually a very effective posture, but it runs the risk of driving other parties away from the bargaining table entirely. China has been reinforced in this behavior because its past shows of pique have led to quick climbdowns. It has occasionally used headfake concessions like its pretense that it would let the renminbi move to a more market based price, to keep its trade partners a bit off balance.

But China has made two very large errors. Despite playing a strong tactical game up to now, it has made a fundamental strategic mistake. It appears to have no plan to change from a mercantilist model. It somehow honestly seems to think that if it can avoid what happened to Japan , ie being forced to revalue its currency (per the 1985 Plaza accord), all will be well. It actually has been moving to a LOWER consumption share of GDP post crisis, the reverse of what you’d see if it were trying to rebalance the economy.

Everyone understands that for China move to a more consumption-driven economy is a very long term project. China could get away with a ton of foot dragging if it were taking legitimate steps in that direction, as it needs to. So far, however, it has demonstrated no commitment to that effort, so it is effectively exporting goods and related unemployment to other countries. In a period where everyone expects protracted low growth, when there is already a large overhang of unemployed workers, that will not wash. Other countries start retaliating on the trade front. And China, with a severely imbalanced economy, with 50% of GDP coming from exports and increasingly unproductive investment (it now takes $7 of investment to generate $1 of GDP growth, a stunningly bad ratio for a developing economy, and markedly lower than the tradeoff in the US), is much less solid that it looks.

China’s second error is a recent switch to disproportionate retaliation. This may simply be a variation in tactics, and it may revert to more measured responses. But if this becomes its new modus operandi, it is likely to backfire and result in isolation, as it has with Israel. The recent incident involving an arrest by Japan the captain of a trawler operating in disputed waters provides an example. From the Financial Times:

The immediate cause of alarm is Beijing’s rough-house tactics following the captain’s arrest in waters near the disputed Senkaku islands, known as Diaoyu islands in Chinese. Not only did Beijing insist on the captain’s immediate release, a demand to which Tokyo eventually capitulated. It also escalated the dispute. It arrested four Japanese nationals; blocked exports of rare earths used by Japanese electronics companies; cancelled diplomatic exchanges; and allowed anti-Japanese demonstrators to pour on to Chinese streets. (It even canned the tour of SMAP, a Japanese boy-band.) Even the release of the captain did not mollify Beijing, which demanded an apology and compensation.

The Japanese have a saying: teki no teki wa mikata, which means “enemy of enemy is friend.” As much as America has done a great deal to make itself unpopular around the world, China’s muscle flexing is making US look attractive by comparison, no mean feat. China is not yet secure enough in its footing to afford the consequences of uniting much of the world against it. But if it continues on a belligerent path, it may do precisely that.

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  1. bob goodwin

    You make it sound like ‘china’ is a sentient being with freedom to do what is ‘right’. China has a long history of political instability, and for a literate society there is still a huge amount of grinding poverty. I doubt that the feelings of foreign leaders is a strong driver of behavior of their leadership.

    I am not saying they are not smart. I am just saying that if you game out the scenarios, China is unlikely to change course.

    1. Yves Smith Post author

      You may be correct that the Chinese leadership does not perceive itself as having much in the way of degrees of freedom, but moving to higher consumption levels WOULD increase the standard of living and hence ought to alleviate domestic political pressure.

      Moreover, this isn’t about “feelings” of foreign leaders, this is about economic interests.

      1. tc

        Yves, India has been a democracy and market economy for decades and it still has more people living under poverty line. How soon you think China could restructure and rebalance its economy to get another more than one hundred millions people over poverty line?

        1. Aj


          “Yves, India has been a democracy and market economy for decades and it still has more people living under poverty line.”

          Decades? I hope you are joking. India has been a market economy precisely for 19 years now. Fabian socialism nearly made India bankrupt (it had to airlift gold to the IMF as collateral for loans). It was never a market economy before 1991.

      2. Jessica

        “moving to higher consumption levels WOULD increase the standard of living and hence ought to alleviate domestic political pressure.”

        Have any of the mercantile east Asia economies managed to wean themselves from high levels of export dependency? The Japanese have known since 1985 at the latest that they absolutely had to. They talked about nothing else through their entire bubble period. “Naijukakudai” = expansion of domestic demand. But they couldn’t do it. I don’t know the details, but it certainly seems that that type of economy builds up very strong mechanisms that do not allow switching over easily.

        Perhaps the Chinese central government feels now like someone who knows they have to get off the Interstate, but aren’t sure which exit they need and right now, they are flying by an exit ramp at high speed and realizing “oh, sh**, that was my exit”. “If I had a small nimble car, I just might be able to change lanes in time, but with five trailers connected behind this truck, it is dangerous to even try. Now what?”
        or to put it another way, 直到音乐停止播放时,你必须跳舞
        “As long as the music is playing, you have to dance”

    2. Carrick

      When it comes to foreign influence issues, there is so much group think and herd mentality in China, that it does become fair to conceive of Chins as a sentient being. If the leadership itself isn’t captured by the long story of humiliation/lost face/etc by the evil imperial West, then the public surely is — it is the drum the CCP has been beating since its inception, so they are wedded to it.

      That’s the root of their belligerence. You wouldn’t see China going to those extremes with South Korea.. SK never invaded, occupied, slaughtered and humiliated them (nor have they offered begging prostrations and given China the face they think they deserve for it.) China/CCP is still fighting that fight, locked in a face grudge, thinking their hard stance will win respect. The rest of the world, including their monied investors, don’t understand or care about any of that, and rightly question whether China is adult/predictable enough to work in.

      The CCP certainly doesn’t care what foreign leaders feel, unless it affects China’s path to accession — there is an ingrained adversarial mentality in the govt, I think. They don’t design or alter policy to advance and preserve a path toward friendship.

  2. kaan

    QE is the ultimate currency manipulation. To balance world econbomy requires putting a full stop to Ponzi Scheme perpetuated by western and japanese central banks.
    All the liquidity they are creating are flooding emerging markets and commodities.

    1. Yves Smith Post author

      That argument does not stand up to scrutiny.

      1. Jim Hamilton studied QE 1 in the US. It lowered Treasury rates by a grand total of 17 basis points. You are seriously going to tell me this made bupkis worth of difference in commodity prices? US QE has resulted in a serious pile up of reserves in the banking system.

      2. The bigger component of QE in the US was directed at the MBS market to compress spreads and boost housing prices. But new home building remains at very low levels. So tell me how this contributed to commodities inflation.

      3. China has been the big source of buying pressure in non-agriculture commodities. China dumped $1.3 trillion of stimulus into its economy between borrowing programs and extra government spending. That’s a much bigger % of GDP than US stimulus measures.

      Your argument might be valid if we had normal monetary transmission mechanisms at work but with the US and Japanese banking systems full of crap assets, those mechanisms are broken.

      The dollar was stronger when QE was on than it is now. If QE had had an impact on commodity prices, you’d have seen borrowing in dollar and selling dollar to buy non-dollar assets. The fact that the dollar held up during QE and fell afterwards raises questions about this notion. It suggests the effects of QE are not transmitting much to other asset markets.

      1. psychohistorian

        I would posit that the US dollars’ position as Reserve Currency clouds the effects of QE in relation to other asset markets. I don’t see this as a balanced comparison with other countries for this reason. This is why I would support calling the US a currency manipulator for bailing out the financial sector.

        I have said before that there is economic war going on but we just don’t see it clearly. The winners are going to establish the bread basket of currencies/assets going forward that will define the basis for all fiat currencies…replacing the US dollar as the worlds’ Reserve Currency.

      2. zjin

        “The dollar was stronger when QE was on than now. ”

        Depends on what currency you are talking about. Many EM currencies have been stronger against USD since QE, especially commodity currencies (AUD i.e., althought not an EM currency)

      3. tc

        Yves, you forgot that the US spending thrillions on wars and military could force trade surplus on ROW. You couldn’t argue that US did not cause much of the trade surplus on other countries by such ‘over consumption’ of US.

      4. Tc

        Yves, you missed the point that China imported raw materials to manufacture goods over 60% are exported and consumed by row(US being thd biggest).

      1. alex

        Wah, mommy, they’re bashing us! Everything China does is “within its sovereign rights”, but any criticism, no matter how justified or well argued, is “bashing” (especially when you have no serious rebuttal).

  3. kaan

    I live in Istanbul. I experience first hand how QE1 enabled many EM banks to create new loans and an induce a debt financed consumption boom, enabled by ECB and FED. Just have a looh to many EM stock markets. Do you think the buyers are locals? or hot money borrowed fron FED at zero p leveraged and punted all over the world.
    FED and ECB enabled carry trades thus replacing BOJ ( hence recent strenght ın JPY ) and real credit expansion occured in emerging markets.
    Similar dynamics are at play in China.
    If ECB and FED gets really conservatıve, we will experience the true extent of bubble in China and many emerging economies.

    1. Yves Smith Post author

      You are misidentifying causes. Did you read my comment? The dollar was stronger when QE was on than now. If it was driving a carry trade to EM assets, you’d see dollar SELLING, hence a weaker dollar. The fact set does not support your contention.

      ZIRP is a different matter, but you brought up QE, not ZIRP.

      1. kaan

        ECB and FED are funding global carry trade activities from ZIRP onward. Whenever risk appetite slows USD strengthens, if it is risk on mode USD weakens. This correlation clealy shows
        FED is the funding source of global hot money flows heading to EM countries and replaced BOJ since 2008 .

      2. fresno dan

        Is the Fed trying to weaken the dollar?
        Is QE suppose to weaken the dollar?
        Does QE weakne the dollar?

      3. MarcoPolo

        I don’t think kaan has misidentified the cause at all. It was completely counter-intuitive that the dollar should strengthen with QE on. A lot of us were wrong-footed with that. There has to be other factors. OTOH I think you are completely correct in yesterday’s comment that China has over-reached. No Asian that I have talked to believes that China should be permitted to solve its problems at the expense of everybody else. And it is Asia, not the Administration or Congress who will be on the vanguard of resolving this issue. Japan, and American protectorate of 140MM population was given preferential access to the American market. China, an American protectorate NOT, with a population of 1400MM is a different case. Yes we all hoped to access that consumer potential. But it hasn’t materialized and not just for the currency imbalances. There comes a place where you cut your losses.

  4. nilys

    “Negative sentiments are out on China in the West again, but economic analyst Arthur Kroeber explains in the Sinica Podcast, lead by Kaiser Kuo, why those bears are wrong. “China is still different.”
    Most of the bears are Western critics, who have no clue about China, Kroeber argues. It is a complex, closed system, where efficiency does not have the same value as in developed nations, he says.”

    “Chief Executive Officer Mark Parker is counting on China and emerging markets to provide the most growth over the next five years as Nike gets 65 percent of sales outside North America.”

  5. nilys

    Also, I wonder what a 25% revaluation will do to my daily expenses, since I shop at Walmart. I saw somewhere that Walmart added around 400 new stores in 2010 to its army of 3900. And even those items that I don’t buy at Walmart, would higher prices at Walmart/Target/etc force prices higher everywhere. Would that mean higher prices in everything. What about the price of oil, wheat and other stuff that I need; wouldn’t it make more expensive in dollars. Would that mean our GPD would shrink relative Chinese GDP; will we even remain the largest economy in the world. Would that also mean more illegal immigrants from Mexico, who would be allowed to enter to fill below sustenance jobs making things that used to be made in China. And how long to you thing the adjustment will last. Besides, why even bother invest in the US, when all the growth is in Asia.

    1. LeeAnne

      I was signaled last winter on China price increases and quality decrease. We don’t have Wal Marts here.

      Those little black gloves you could reliably pick up on the street for $1 were suddenly nowhere to be found, not in New York, Chinatown, midtown in the 40s, nowhere.

      The cheap gloves that were available in stores were too thin and the black cotton really ugly and cost somewhere closer to $3 and up.

      I’ve been signaled accurately on market trends on a lot flimsier evidence than that.

  6. purple

    The collapse of the US consumer means corporations much chase profits overseas and China is the big prize. This legislation is proxy for a host of complaints relating to that issue. But politically it seems conservative forces have the momentum in China and in fact are closing the country off bit by bit. Some evidence of this leaks out from time to time, for instance a NYT article on Wu Jingling last year:’In books, speeches, interviews and television appearances, he (Wu) warns that conservative hardliners in the Communist Party have gained influence in the government and are trying to dismantle the market reforms he helped formulate.’ link

    When China has been strong historically it has been highly centralized, perhaps for geographic reasons, and that isn’t compatible with the kind of parliamentary style democracy or capitalism that the US is advocating for.

    1. alex

      “You have the power”

      What millennium are you living in? You think most industries are still vertically integrated (at least within a country)? If a product says “Made in China”, then how much of the value is added in China? You don’t know – it varies all over the place. Same goes for things that say “Made in USA”. My Toyota actually has a higher % of value added in the US than most “American” cars.

  7. Bill Smith

    While this feels good, the US manipulates its currency too. ZIRP and QE.

    If people think this will bring manufacturing back to the US, they will be mistaken. It will move to other Asian counties long before it makes its way back to the US.

  8. koshem Bos

    Despite the reasonable justification for why China may eventually be forced by a preponderance of countries objecting to their arm-twisting and currency manipulation to change its approach, I don’t see this happening for several reasons.

    Both the US and the EU deal from a very weak hands. The EU is at a point of possible breakup due the financial collapse of four of its members. The US has seen decline for at least a decade and some claim since Reagan. China, one way or another, are only starting the ascend.

    Historically, we see a clear shift from west to east that is starting to elevate India and China and actually a western country, Brazil. This trend has been brewing since the end of colonialism after WWII. It is difficult for me to see this trend stopped because China’s thuggish behavior.

    In addition, in 1975 the UN has decided that Zionism is racist. Thus, the UN decided that the all nations are entitled to nationalistic movements except the Jews. This happened way before the PLO was an important movement, way before the settlement were the size they are today and Hamas wasn’t even in existence. This is when Israel’s isolation started. The rest is just high school excuses.

  9. Jackrabbit

    But China has made two very large errors. Despite playing a strong tactical game up to now, it has made a fundamental strategic mistake. It appears to have no plan to change from a mercantilist model. . .

    China’s second error is a recent switch to disproportionate retaliation. This may simply be a variation in tactics, and it may revert to more measured responses. But if this becomes its new modus operandi, it is likely to backfire and result in isolation . . .

    As Yves hints at (“variation in tactics”), it seems likely that these two “errors” are related. Why would China antagonize their trading partners except that such intimidation supports a larger purpose? Mercantilism is a strategic choice. We are playing monopoly while they are playing chess.

    The crazy thing is, as far as I can see, the West plays along. China entices us with its potentially lucrative market but it is questionable if they have any real intention of opening their markets to anything like what WE would consider to be free trade. (Oh yes, in certain cases they allow access – with restrictions and caveats – but it seem to me that where they do so they’re more interested in learning and building domestic world-class competitors).

    Interestingly, for readers of this blog, the financial industry has been especially desirous of trade with China. But that may not be panning out as they hoped (witness Goldman selling its stake in ICBC).

    1. tc

      Please note that China has more less balanced trades with ROW (trade deficits with many EM and commodities exporting countries and also Germany and Japan). So I think it is incorrect to insinuate China ‘manupulate’ its currency against every country. I think closer to truth is the US dollar is over valued against ROW.

      1. Jackrabbit

        Those deficits support China’s export economy. Raw materials from Emerging Markets/Lesser Developed countries and Industrial equipment from Germany and Japan.

          1. Tc

            Part of the reasons why US buy more and sell less is because US needs to spend thrllions on wars and military. ROW needs to consume and import more to balance trade with US. The problem is how could ROW boast it’s consumption power to balance the part of US consumption arising from wars and military?

  10. AmericaninChina

    I can only laugh when I read Western analysts’ assertions that China’s economy is “severely imbalanced” being mostly reliant on exports; that China has failed to move from the mercantalist model; that China’s economy will soon collapse from its huge real estate bubble, etc. etc. China now has a huge domestic economy that’s probably larger than that of the US. Because very few Westerners actually travel thru China and most believe that BS statistics that the Chinese government puts out, the prevailing view in the West is that China continues to be a “developing” economy which is still mostly reliant on exports, and as such will crash if the yuan is revalued. This is the view that has been carefully crafted by the Chinese government and has been used over and over again (successfully) to justify their currency peg, and to ensure the country’s predominance in global manufacturing. Ms. Pelosi states that “China needs to play by the rules..”. The only important “rule” for China is to become a dominant global economic power, and that they have achieved, greatly helped by the American patsies who during the past several decades have willingly transfered their vast wealth to China.

    1. Yves Smith Post author

      You misrepresent the post. It clearly states exports + investment at unprecedented levels. You incorrectly claim I am just talking about exports. And the productivity of that investment is terrible, as also indicated in the post. This is not a winning economic strategy.

  11. Jim Haygood

    ‘[China’s] continued purchase of dollar assets is prima facie evidence of continued currency manipulation.’

    Yes, and it’s also evidence of the US running a chronic trade deficit. Which in turn is evidence of habitual abuse of its reserve currency privilege.

    China’s sin of currency manipulation and America’s sin of flooding the world with fiat currency while lacking any plan to restore trade balance, are two sides of the same coin.

    As others have suggested, ZIRP and QE both theoretically affect the dollar’s external value (though QE operates with with a distinct lag).

    I have argued that QE purchases of Treasuries have destructive expectation effects. Rather, the US should confront China directly, tit-for-tat, by demanding access to yuan currency reserves.

    Countervailing duties are so 20th century, so dinosaur trade union in style, so economically destructive. No wonder the KongressKlowns representing pokey Moscow-on-the-Hudson — once a great trading city, history books say — voted for them across the board.

  12. jim

    To me China’s biggest weakness is it size of it’s population and the level of polution in the environment. It seems simply unsustainable.

    I would encourage the rest of the world consider how much of the worlds resources China is allowed to have access to.

    1. tc

      over 60% of what China manufactured is exported and consumed by ROW. Too bad China is to bear all the pollution while so many of ROW consume products out of China

      1. alex

        Any time they want to China can stop all that pollution generating production for export. Alternatively, they can strengthen and even actually enforce their environmental regulations. What an idea!

        1. jim

          I don;t think China can afford to stop exports, because not enough of your people can support any menaingful domestic demand at this point. You also can’t afford to reduce pollution becuase your business model revolves around dirt cheap energy and labor. China will continue to pollute where their environment until they will have to eventually conquer the ROW or move to another planet. SO the fault to the Chinese plan is they will be too sick to exist, or have to win world war 3 to get out of the literal mess they have created for themselves.

          1. Yves Smith Post author

            Since when is a businessman a victim? That’s the picture you paint. Chinese businesses went for competing on price. This was NOT a “requirement”; this was their way to try to gain competitive advantage. This was not the only route; look how quickly Japanese companies established brand recognition in the US and were innovative product designers.

          2. Tc

            China’s priority is still bread and butter…to get another one, two hundreds more millions living under poverty line(under 2 US dollar/day) to above. Then hopefully it could focuss fully on issues of environments and imbalances.

          3. alex


            That’s precisely why increasing the RMB would help, as it would allow domestic consumption to increase. Why is a country with hundreds of millions living on less than $2/day loaning $2T to the US? Answer: because there are some people in China who profit greatly from exporting things produced by such cheap labor.

      2. Jackrabbit

        The ROW (well, the West, anyway) wonders when China will improve its labor and environmental laws which currently help China to undercut manufacturing costs of so many other nations.

  13. Robert Dudek

    “Rather, the US should confront China directly, tit-for-tat, by demanding access to yuan currency reserves.”

    And China will say “no”. Then what?

    US should not threaten – they should go ahead and slap tariffs on all Chinese goods.

    Then take this money and invest it in US-based green technology companies. They will then be able to use China’s mercantile policies to help build 21st century industries in the US.

    Of course this will hurt the US consumer, who has become addicted to cheap Chinese trash. No one thinks an addict can get clean without pain.

    Free trade only works if everyone involved believes in it – China does not.

  14. PDC

    hmmm… suppose things get really harsh. The next logical step for China would be… start shopping in US Congress. At least, this is what I would do.

    1. alex

      China buys Congress by proxy. Half of “Chinese” exports to the US are the products of “American” MNC’s.

      There are rules on lobbying and bribes (oops, I mean campaign contributions) by foreign interests. But why is Dell Corp., for example, considered American?

  15. Jim the Skeptic

    Part of the reason for China’s great economic success since 1980 is because they exported much more to the US than they imported from us. They have managed that imbalance to some extent by controlling the value of their currency.

    I understand that the Chinese have a very large population that they must raise out of poverty but this trade imbalance has caused a lot of problems in the US economy, including the current high unemployment. The Chinese have acted in their interest, we should act in ours.

    Since about 1980 China has been so successful economically that they have set aside increasing funding for their navy. With that increased naval power they have started to lay claim to more of the South China Sea. Most recently they have been in increasing conflict with the Japanese in the East China Sea.

    I understand that China received very harsh treatment from Japan and the western powers during the first half of the 20th century. This has left them with a deep distrust of foreigners and a desire to defend their interests. But the right to protect themselves can not extend to the abuse of their neighbors. They are laying claim to parts of the South China Sea that Vietnam, Malaysia, Brunei and the Philippines all have some claim on. Look at the map in this article:

    Rearranging borders on a map is not a benign issue, it is a path to war. A Chinese trawler captain rammed a Japanese ship in the East China Sea and I do not believe that he was acting on his own. Another Chinese trawler attempted to interfere with a US naval vessel in the South China Sea and I do not believe that captain was acting on his own either. Sooner or later one of these events is going to get out of control and a trawler will be sank. The Chinese can blame themselves when it happens.

    We need to decide right now whether we are willing to fight a war to defend our right of navigation through the international waters of the South China Sea. If not then we will need to withdraw our ships from that sea to avoid bloodshed. Similarly we need to decide how much of the East China Sea we will defend for Japan because that is where it will end. The Chinese are acting in their interests, we should act in ours.

    The problem is not that we don’t understand the Chinese. The problem is that China has rising expectations about how much of the world’s resources they can claim as their own. Be that territory or the jobs which are transferred to them via imbalanced trade.

  16. avg john

    For me it’s all about “shared pain”.

    Many economists claim that pursuing a fair and balanced trade policy is simply protectionism and will lead to higher priced goods resulting in a lower standard of living for Americans, and will not meaningfully create new jobs and opportunities for America. I don’t see it that way, but for argument sake I will allow that just pressuring China to revalue its currency or placing tariffs or imported goods and components is not a magic bullet that will restore our economic health.

    Now admittedly, I am not an economist or Wall Street global financial analyst. I am just one of the great unwashed masses. I approach this just from what I consider common sense. And my common sense tells me, when I reflect on America’s economic future is, “here be the path to destruction, despair and poverty”.

    Economists(some) tell me it is in America’s long term best interest to move to a global based “free trade” economy, but I must be patient because in the short term it means a little sacrifice, dislocation and pain, while our neighbors in emerging markets build the necessary physical infrastructure and sophisticated capital markets to support a healthy mature economy. Fine, I’m just a little person and I have to do the best I can under the circumstances.

    BUT, when economist and Washington policy makers ask me to be patient WHILE wall street and multi-national coporations are making record profits, executives are making obscene bonuses, the streets of our capitals are flooded with corporate and foreign business lobbyists, poverty is rising, unemployment is in the double digits, and our nation is held hostage to foreign ownership, count me out. If sacrifice and pain is required, let’s ALL do a little sacrificing, thank you very much.

    Let the policy makers concentrate their efforts on making sure Americans basic needs are met. People are well fed and housed, they have affordable and quality health care, they are safe from violence, they are free, and they have opportunity to be gainfully employed and for those that are willing, they have opportunity to achieve their dreams with enough hard work, diligence and perhaps a little luck.

    I say we need new tough trade policy(the stick), coupled with intelligent targeted tax policy (the carrot), to restore the American economy. For me (and I believe many of the unwashed masses), I don’t give a fig whether higher prices on discretionary purchases of foreign goods means little johnny won’t have as many ipods, xboxes, or a new shiny car when he turns 16. If it means little mary doesn’t get that $50,000 party on her 16th birthday, well that’s tough. And the simpsons don’t need a television in every room, if it means double digit unemployment for their fellow Americans.

    I am an independent voter, and this topic is one of my hot buttons. No politician that supports this continued path of economic destruction, greed, and madness need count on my vote come November. I don’t care what ivy league school they graduated from or how smart and sophisticated they appear to be. To me they are idiots.

    1. alex

      “To me they are idiots.”

      That would be a reasonable excuse, but the truth is worse – they’re traitors.

      1. Greg

        More accurately : They’re not counting on your vote, because they have your neighbours’ and cousins’ votes.

        And corporations buy those votes only when they are for sale.

  17. Joseppi

    China has a focused sovereign strategy and that is mercantilist supremacy. The US has the misfortune to be controlled by multinationals that have no allegiance to a sovereign US. That inescapable dynamic will forge a future that is detrimental to the US.
    In China it may take $7 of investment to produce $1 in GDP, but in the US it takes at least $3 of debt to produce $1 of GDP – Big difference. China has the capital and the US has the leveraged debt.
    China has erected currency walls to prevent this western credit/debt manufactured out of thin air to invade their economy and taking over. The Chinese have been invaded enough and will not let it happen again.
    Using tariffs, which should of been employed from day one and changing the tax structure that rewards corporations for off shoring – At this late stage of the chess game to think the US can bluntly ram down the currency door for an opening move after letting China make all the moves for years is, well, cow boyish, and will lead to bombastic and bellicose maneuvers in the South China Sea.
    This will only lead to further hemorrhaging of productive investments and social needs from an already anemic empire, and possibly silkworm missiles across the bow.

    1. avg john

      cowboyish, huh?

      You’re already beat. You say let’s give, I say let’s fight. The Chinese aren’t stupid. Half a loaf is better than none.
      And if it comes down to it, we have plenty of food and fresh water (as Hank Williams junior put it “country boys can survive”), how about China? It is reasonable to begin moving away from our current trade policies the sooner the better. I don’t wish to destroy China, but I don’t want them to destroy America either.

      We are NOT a back word, illiterate, emerging market country mired in poverty. Yes, we have roads and bridges that need fixing, energy and communication grids to upgrade, empty factories and mills to renovate, upgrade and build, but I think you would be surprised by how fast America could be put back on track with the proper amount of onshore capital investment and the proper trade and tax policy. Get people working in good paying jobs, restore their pride and confidence, and step back and watch our economy boom. At least give it your best shot.

      We just need the will and the leadership of this country to begin acting now. We have an educated population, great universities, sophisticated financial markets, railroads, trains, trucks, heavy equipment, technology, etc., etc.. Everything Germany and China have and more. The only thing stopping us is this fixation on some crazy notion of the sanctity of “global free trade”. Its madness.

      Let’s be clear. If it all comes down to a buy or build decision from a strategic planners office in a large global corporation and all other things remain the same, then yes, we can’t compete against $1 per hour labor. But who wants to? We need to begin restoring America to a highly diversified, self reliant economic power once again. We need to be more than a nation of global investors. Trade policy that creates a win-win situation for both parties.

  18. Jim

    I’d like to see a trade war break out between China and the US and see the arrogant, overbearing US taught a painful lesson. It might be a useful way to take the US down several pegs. It is pegged a present far above its proper place in the world pecking order. If it doesn’t pull in its horns, they will be chopped off sooner or later, and that will be very painful.

      1. Jim

        Oh gee. Now you’ve really scared me. I’ll dump all my Chinese stocks just as soon as I can. That will be a big relief. Then when China goes down the tubes I will have my money to buy the new General Motors and Microsoft and other super profitable US stocks. Thanks for the warning. LOL

        1. alex

          And how does your bluster jive with your earlier statement that “I don’t think China can afford to stop exports”, which is exactly what a trade war would do (or at least greatly reduce them).

          In one place you say there’s no stopping the Chinese juggernaut, and in another you effectively say that a trade war would devastate the Chinese economy. Which is it?

  19. MyLessThanPrimeBeef

    It will be OK for unemployed US workers because Buffett, together with many Chinese billionaires, will be charitable there for us all.

    Just relax.

  20. Economic Darwinism

    Come on Yves.

    I love your blog. You’re totally awesome. I’m a huge fan.

    However, your stance on China is just flat wrong.

    How do you let your currency float without a decent bond market? China is making huge strides to develop an RMB bond market across Asia. Why? In order to eventually let the RMB float in a responsible manner.

    China is focused on a floating currency. Why would you implement stop-gap revaluation measures when your goal is a full-on floating currency?

    1. Yves Smith Post author

      Thanks for the kind words, but from what I have seen, China isn’t interested in a floating currency. “More market based” which IIRC is their formulation, does not necessarily mean floating, much the less free floating. Chinese officials have repeatedly advocated a fixed rate regime in a number of forums.

      And the sticking point is the dollar peg. If China had revalued the RMB to a level that was less undervalued v. the dollar (as you know, there is a lot of debate as to how undervalued the RMB is, but there seems to be widespread agreement that the undervaluation is significant), you wouldn’t see these beefs. And the operation of the peg leads to large scale capital imports to the US. We really don’t want more debt accumulation, thank you very much.

      This is why Keynes recommended the Bancor regime, which had a mechanism for discouraging countries from accumulating FX surpluses. It is a very appealing strategy for the perp, but pursued too long or on too large a scale, destabilizes the entire system.

      1. Economic Darwinism

        Yep yep. I agree with your logic (stellar as usual). The only gripe is with not giving enough credit. I actually have a lot more faith in fiscal and monetary policy in China than I do in the US (which is a big reason why I moved from one of the largest asset management firms in the US to one of the largest asset management firms in China). The history books will not be kind to Greenspan or Bernanke. Much less Paulson and Geithner.

        I, like many other California kids who’ve moved to Asia as well, want my 5 year old daughter growing up speaking Putonghua.

        Mark my words. In less than 5 years, the RMB will be fully floating starting with the HKD. Sooner if we see another leg of the crisis (which I fully expect since none of the problems were actually addressed). With that kind of time line, why play around with revaluations?

        PS: I wish you would have turned activist earlier. I think you had a voice that might have been able to help change the course of things. At this point, I’m happy to see you being more active, but think it is too late (hence my move). The audacity of lost hope hurts worse than the audacity of hope.

        1. Yves Smith Post author

          We are on the same page with the astonishingly bad regime in DC. But I regularly said bad things about the old regime (and this one is a continuation), see in particular posts on MLEC and the TARP.

          I DID push hard for bank nationalization, um, resolution when Obama came in. I dumped on the stress test charade frequently while it was in progress. And I was VERY early to call out Geithner, see:

          This is just a sampling, mind you…..

      2. Tc

        Yves, I think it is warped logic to suggest that the undervalued yuan forces more debts on US. You ought to know the treasury auctions tens of billions of bonds to borrow. The treasury borrows because it has needs to borrow not because it cares about China having a lot of extra dollars and no other place to go.

        1. alex

          Reducing US indebtedness without adjusting exchange rates would simply force the US into an even more severe recession. Unless of course you believe in the doctrine of immaculate transfer.

  21. Economic Darwinism

    I think your voice matters. I wish you and some of the other high-profile (for good reason) bloggers, such as Barry Ritholtz and Calculated Risk would put your heads together and try to find solutions that make sense. If you all endorsed a specific plan and tried to rally your readers behind that plan, something might actually happen. Or so one could dream. You all were phenomenal at seeing and reporting on what was happening, but we need ideas.

    But the time line I had in mind far predates November 2008, i.e. the earliest article you refer to above. By that time, it was pretty much too late. You were all well aware of the slow motion train wreck back in 2006 and earlier. I know, because I was aware of it due in large part to reading your blogs. I remember feeling like a Cassandra. One of my last research pieces (in mid 2007) before resigning was a warning that the Bear Stearns hedge funds blowing up was the trigger for a crisis that would far surpass that of LTCM due to the sheer size of the credit/structured derivatives market which no one (especially the quants and risk managers) understood. All my credit models were showing extreme negative risk premiums across the entire fixed income spectrum. Grantham was talking about the first global asset bubble, etc. Things felt like a jack-in-the-box ready to pop. It just needed a trigger and the ABX/Bear Stearns was that trigger.

    Now here I am sitting in Hong Kong. The mood here is quite different than Los Angeles (and probably NYC), believe me. I am sincerely impressed by the steps China is making to float their currency and for the US to try to accelerate the process, although not surprising, is completely counterproductive. They should focus on getting their own house in order starting with getting rid of Bernanke and Geithner. As long as they remain in control, the US policy makers have very little legitimacy.

    Remember the Chinese students laughing at Geithner? Imagine what they would do if Bernanke showed up.

    When China is ready to float its currency, it will float. In my opinion, this is likely to happen prior to 2015. But it will happen slowly and methodically.

    1. Skippy

      So many forget ABX, this financial F’up / war is a dog and pony show, and for what, propagandist exceptionalism. History tells us how that plays out…so many fails and for what, the inability for a few to suffer humility…which the Chinese have done in spades, yet the Wests answer is more of the same?

      Some feel inclined to believe they are superior, then the wheel turns and what then, the commons get the short end of the stick, fighting Orwellian ghosts for their masters, and out of their back pocket or at pointy end of a stick. Yet the masters wine and dine…ech.

      Skippy….The East never was a threat to the west, its just the opposite, history is funny

      1. Tc

        For few hundred years, the west lead the world. Few hundred years clearly establishes that the west are vastly more superior, never mind other civilizations led for few thousand years.

    2. Tc

      It is to be noted that PBoC has allowed big banks in HK, S Korea, Malaysia at least to trade Yuan and the daily mid value is fixed by the pre opening quotes from these banks and Chinese banks of course. Also China has currency swaps agreements with several of it’s big trading partners to settle trade in yuan, bypassing dollars, hopefully in the long run, reliance on US dollar could be eliminated.

    3. alex

      Economic Darwinism: “I am sincerely impressed by the steps China is making to float their currency …”

      Even if China does float the RMB it doesn’t mean an end to Chinese mercantilism and currency manipulation. Japan had a floating currency even pre-Plaza and it didn’t stop them.

      In fact I’m sympathetic to China’s fears about a float, especially when one remembers the Asian Crisis. Those who tout fully floating currencies seem to think that markets are stable creatures. That would be funny if it wasn’t tragic. But you can have a peg and adjust the peg to keep trade reasonably balanced. A float is not necessary for balance, nor does it ensure balance. Basically the float is a distraction from the more important issue.

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